Ready for Residential Land Value Capture? Betterment Tax, Imputed Rent and the Devolution of Urban Governance Dr Yiming Wang Senior Lecturer in Cities and Public Policy Director, MSc in Public Policy Programme Centre for Urban and Public Policy Research School for Policy Studies University of Bristol Office Address: 8 Priory Road, Clifton, Bristol, BS8 1TZ Email: yiming.wang@bristol.ac.uk Tel (o): +44 (0)117 954 6777 Executive Summary: Assessment of land betterment tax based on residential property value is practicable. The betterment levy can be rated with reference to imputed rent (i.e., the estimated market rental worth of owner-occupied residential property) and thereby applied to both owner-occupants and investors. Residential land value capture requires strong local political leadership at the cityregion level, especially in terms of the devolution of fiscal power from the central state to the local councils and metropolitan authorities. Acknowledgement: I am grateful to David Sweeting for his comments on a draft version of this document. I myself take full responsibility for the views and opinions expressed herein. Page 1 of 5
Ready for Residential Land Value Capture? Betterment Tax, Imputed Rent and the Devolution of Urban Governance Like many public policy initiatives, land value capture is sound in theory but tricky to implement. The basic economic principles underpinning land value capture and, in particular, land value tax, date back to the writings by George (1863) and Ricardo (1867), whilst also acknowledged by contemporary economists such as Stiglitz (2014). However, legislation attempts to address the corresponding policy issues have been less than successful within the UK, especially in terms of capturing residential land value to support local public finance (Wang et al., 2015). Built on my research and consultation experience during the past few years, this document is intended to make three arguments regarding the exercise of residential land value capture within a UK policy context. First, a property-based assessment of land betterment tax is a practicable approach to capture residential land value. Second, the betterment levy can be rated with reference to imputed rent (i.e., the estimated rental worth of owner-occupied housing property) and thereby applied to both owner-occupants and investors. Third, residential land value capture is primarily an urban public policy issue, the resolution of which requires strong local political leadership at the city-region level, especially in terms of the devolution of fiscal power from the central state to the local city councils as well as the associated regional metropolitan authorities. Property-based land betterment tax Residential land value capture can take various forms in policy practice. Baddeley and I (2016) have systematically compared between UK, USA and China, trying to understand their different policy choices for the same purpose of land value capture. For example, many suburban communities in America rely on borrowing against future property tax income to privately fund the development of local infrastructures (Greenbaum and Landers, 2014). In contrast, because all of the land in urban China is constitutionally under state ownership, uplift in land value is captured in lump-sum commission fees paid by private real estate developers to the state government. This mechanism has allowed the Chinese state to generate most public funding for urban infrastructure development. 1 The UK differs from both America and China in terms of its preservation of private landownership, albeit with most physical infrastructures being publicly funded, either by sovereign debts or by using government revenues generated primarily from income tax and VAT (Value Added Tax). In my opinion, a strategic priority in terms of the reform of UK public finance system is to shift its overall tax base from income and consumption to land value as an implicit element capitalised in the worth of real estate property. 2 1 The Chinese land value capture system has been introduced in more detail in my recent response to a policy questionnaire distributed by the Scottish Land Commission. However, I did warn in the same document of the substantial risks involved in the Chinese model, mainly in terms of the state s vested interest in inflating land value, hence the upsurge of real estate property price. 2 This view resonates conceivably with Henry George s original idea about single tax. Page 2 of 5
With the aid of modern technologies such as GIS (Geographic Information Systems), much progress has been made with respect to the empirical estimation of land value betterment typically as a result of public investment in physical infrastructures or other civil facilities (Banzhaf and Lavery, 2010, Chapman et al., 2009, Ryan, 1999, Wang et al., 2015). While academic research in this area witnesses a rising degree of technical sophistication, less attention has arguably been paid to the practicability of land value assessment. To what extent a new valuation scheme conforms to the existing practice and whether it is understandable, communicable and makes common sense to the general public are however quite important from a policy implementation point of view. In my opinion, a council tax supplement, analogous to the business rate supplements legislated in 2009, could be levied as de facto land value betterment tax based on residential property value and by referring to the existing council tax banding structure (See Wang et al., 2015, p.390 for a brief policy discussion with reference to the case of Cardiff Bus). Tax rating based on imputed rent With regard to the rating of land betterment tax, my main view is that it should be based on rental worth to capture land value uplift, because the sale price of a residential property often involves speculated capital gains, especially when the overall price-to-rent ratio is excessively high in the corresponding local housing market. 3 I tried to convey the same point when I was invited in 2014 by the Royal Institute of Chartered Surveyors (RICS) to speak at a symposium on land value tax at RICS headquarter in London. Some of the audience then asked whether the tax should be collected from the renters or the landlords and, moreover, what would apply to owner-occupied dwellings? Conceptually speaking, the questions raised are less complicated than they appear to be. For instance, according to the economic theory of tax incidence (Mieszkowski, 1967), whoever pays a nominal tax, the actual tax burden will be shared by both the buyers (e.g., renters) and sellers (e.g., landlords), depending on the relative elasticity of demand versus that of supply in a market, or put simply, whether it is a buyers market or sellers market. Likewise, in the case of owner-occupied housing, it is possible to estimate imputed rent (i.e., the estimated market rental worth of owner-occupied residential property) and use it as a basis for land tax assessment (Bourassa and Hendershott, 1994, Goode, 1960). Practically speaking though, a rent-based land value capture scheme may be perceived as controversial. Tax collection from the renters would presumably be seen as politically incorrect, while the landlords are likely to contest against double taxation, since they are already paying income tax on the rent payments they receive. A potential solution to the problem, as mentioned earlier, is to replace the tax on the landlords rental income with an annually assessed rent-based land betterment levy, hence essentially a tax shift from income to land. 3 This problem has been illustrated empirically in one of my recent studies about the land betterment effect of Shanghai Metro in China. The paper reports that the assessed transit premium based on local home-sale prices is almost three times of the rent-based estimation and therefore argues for the need to differentiate between the uplift of property value due to actual improvement in transport accessibility versus the real estate investors' speculation on future capital gains through transit-induced property value appreciation (Wang et al, 2016: 61). Page 3 of 5
This however leaves another, arguably more major, problem unresolved: How to convince the owner-occupants, who account for more than 60% of all households in the entire UK (Barton, 2017), about the legitimacy of land value capture based on this seemingly rather exotic idea of rent imputation? While communication and education certainly have their own roles to play, a key step to address the issue is perhaps to work out a preliminary land value capture system based on imputed rent and compare the potential rating outcomes with the current council tax scheme. My conviction is that the general public should be more receptive to intuitive comparisons than technical specificities. If properly estimated, imputed rent, compared with the now rather obsolete council tax banding criteria, should reflect more accurately the contribution of public spending on local services and infrastructures to the values of private homes. The devolution of urban governance From a policy implementation perspective, land value capture and congestion charge share several similarities. First, both policies are intended to resolve market failures that are primarily situated within urban settings and triggered by the intrinsic nature of the city as an agglomeration economy (Krugman, 1991). 4 Second, even though most urban residents recongise the social costs of traffic congestion and land speculation, many are reluctant to pay out of their own pockets for the according corrections of market failures. Third, the implementation of both policies requires strong, relatively autonomous, local political leadership. The levy of London congestion charge, for example, is attributable to Ken Livingstone s authority and resolution as the first directly elected mayor of the Greater London Authority (Worthy et al., 2018). Likewise, the 2009 Business Rate Supplements (BRS) Act has devolved the corresponding taxation power to local councils (which are allowed to levy BRS jointly, for instance, as a combined metropolitan authority), empowering local political leaders at the city-region level to make more direct decisions regarding the taxation of local commercial properties for value capture purposes. In a nutshell, the devolution of urban governance seems to be setting a stage for strong local political leaders to make more difficult but necessary policy decisions, including, but not limited to, the ones on land value capture. On the other hand, cities in this globalization era are connected and often faced with a similar set of urban policy issues; unilateral localised policy actions are seldom sufficient to address the worldwide urban problems (Barber 2013). For example, I was involved in a small research project (led by my former colleagues at University College London) which looked into the flows of international capital and the according impacts on the local built environment in London. Land value tax, once levied, is conceivably going to curb property banking by many speculative foreign investors in London s real estate market. However, this would not stop the fluid movement of capital from London to another safe haven city. As Barber (2013) has pointed out, there is a need for cities around the world to take coordinated action. The same idea probably also applies to the issue of residential land value capture. 4 According to Krugman (1991), cities emerge because of the positive economic externalities of agglomeration and disperse due to the negative externalities of congestion. Page 4 of 5
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